Even Toronto's 1% Are Being Priced Out Of Housing Market: BMO

Toronto’s runaway house prices could threaten the city’s economy if even the wealthiest one per cent of earners find themselves priced out of the market, as is now happening, the Bank of Montreal’s economics branch is warning.

BMO chief economist Douglas Porter crunched the numbers and found that someone earning $225,000 a year — right at the cutoff line for being in the one per cent — would not be able to afford to buy an average-priced single-family home in Toronto.

That’s despite the fact this earner would be considered rich under tax rules. Anyone in Ontario earning above $220,000 pays a combined top marginal tax rate of 53.53 per cent.

Taking into account the "stress test" for mortgages that the federal Liberals instituted last year, Porter estimated that a couple earning $225,000 with $100,000 for a down payment would be able to afford a house of $987,289. The average price of a single-family home sold in Toronto in February was $1.57 million.

“It will be incredibly tough to attract talented folks ... if they will struggle to buy a home and yet still pay taxes of over 50 per cent,” Porter wrote.

Surely, [$987,289] will be enough to afford a reasonable place? That depends on your definition of reasonable. Lo and behold, the average detached home price in Toronto (the 416 region) is now a cool $1.57 million, putting it well out of reach for the Dorights.

Okay, they decide a longer commute wouldn’t be such a bad thing, for now, so they look into the surrounding regions (the 905 belt) for a detached home. Turns out, the average price there is $1.11 million. Strike two. Okay, a semi-detached in Toronto would be acceptable, as long as the biker gang in the next-door unit is mostly quiet. Turns out, the average price is $1.08 million. Strike three.

So of course, the question becomes, who’s buying houses at $1.57 million? Some have pointed the finger at foreign cash buyers, others at cash-rich speculators.

But the single largest contributor may be move-up buyers — those who’ve seen the value of their home soar in recent years, and need to take a mortgage for a relatively small portion of a new home’s value.

A "sold over asking" sign is on display on a house for sale in Toronto's housing market, October 21, 2016. (Photo: Reuters/Hyungwon Kang)

Toronto’s housing market is “mainly being driven by move-up buyers leveraging the equity in their existing homes,” David Madani, senior Canada economist at Capital Economics, wrote last month.

“Since these move-up home buyers obviously already live in a home and are largely responsible for the big increases in house prices, it stands to reason that there isn’t a major shortage of housing causing housing prices to escalate,” he added.

“Investors are the other reason for rising house prices. There are always shortages of housing for people wanting to buy their third, fourth or tenth property!”